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Oil-to-Cash: Fighting the Resource Curse through Cash Transfers

Natural resources and the income they generate can stifle development by undermining the relationship between citizens and their state. This CGD initiative explores a policy option—direct distribution of resource revenues—to encourage a “social contract” in resource-rich countries. The income generated by resource extraction can be distributed directly to citizens and then taxed by governments. With a personal stake in the government’s budget, the citizens could then hold the government accountable for providing goods and services with their taxes.

The resource curse is well known. Countries rich in extractable natural resources, especially oil, often suffer from high poverty, frequent conflict, crummy governance, and endemic corruption. Current policy prescriptions for countries hoping to evade the curse often fall short, partly because they do not address the internal political economy effects of the massive unearned income—the so-called “rents”—generated by natural resource extraction. When governments can survive on natural resource rents, they do not need to tax their citizens. In turn, citizens do not expect or demand public services, clean government, or even basic accountability.

CGD is expanding work on one policy option that may address the root of the resource curse and help to foster a social contract in resource-rich countries: direct distribution of revenues. Under this proposal, a government would transfer some or all of the revenue from natural resource extraction to citizens in a universal, transparent, and regular payment. Having put this money in the hands of its citizens, the state would treat it like normal income and tax it accordingly—thus forcing the state to collect taxes and fueling public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.

CGD has a long history of work on the resource curse, and has been exploring the idea of direct distribution. Alan Gelb was one of the first authors to analyze the political economy effects of rents in his 1988 book, Oil Windfalls: Blessing or Curse? Arvind Subramanian has proposed direct distribution for Nigeria, and CGD president Nancy Birdsall and Subramanian made a case for the policy in Iraq. Todd Moss in 2009 proposed that Ghana set up a system for direct distribution ahead of the oil revenues, and continues to oversee the initiative.

This CGD initiative brings together Birdsall, Gelb, Moss, and Subramanian to explore the conceptual and practical questions of piloting direct distribution: Where might such a scheme make sense? What conditions might be necessary for success? Who might be the winners and losers? How would it be distributed? What new technologies could be employed?